Understanding Lenders Mortgage Insurance (LMI)
What LMI is, how much it costs, and strategies to avoid or minimize this additional cost.
Lenders Mortgage Insurance (LMI) is one of the most misunderstood costs in home lending. Despite its name, it protects the lender, not you. However, it serves an important purpose: enabling home ownership with deposits smaller than 20%. This guide explains how LMI works and your options for managing this cost.
What is LMI?
LMI is a one-off premium charged when you borrow more than 80% of a property's value. It protects the lender if you default and the property sells for less than your loan balance. The cost increases with your loan-to-value ratio (LVR)—a 95% LVR incurs much higher LMI than 85%.
How Much Does LMI Cost?
LMI varies by lender, loan amount, and LVR. For a $500,000 loan with 10% deposit (90% LVR), expect $8,000-$15,000. With 5% deposit (95% LVR), this jumps to $15,000-$25,000. The premium is calculated by insurers (Genworth, QBE) and can't be negotiated, but it can be added to your loan rather than paid upfront.
Who Needs to Pay LMI?
Anyone borrowing more than 80% of the property value typically pays LMI. Exceptions include: First Home Guarantee participants (5% deposit, no LMI), some professionals (doctors, lawyers) who may access LMI waivers, and family guarantee arrangements where a family member uses their property as additional security.
Strategies to Avoid LMI
The most straightforward approach is saving a 20% deposit. Alternatively, use the First Home Guarantee if eligible, consider a family guarantee (parents use equity in their home), or explore professional package loans if you work in certain industries. Some buyers purchase below 80% LVR then renovate or extend.
Is Paying LMI Worth It?
Sometimes yes. If property prices are rising 5-10% annually, waiting another 2-3 years to save the full 20% might cost more than paying LMI now. Additionally, being in the market sooner means building equity and locking in your repayments. Run the numbers with a mortgage broker to determine your best path forward.
LMI vs Genuine Savings
Most lenders require "genuine savings"—money held for 3+ months in your account. Gifts from family count differently across lenders. If using gifts to reach 20% and avoid LMI, check lender policies. Some accept gifted deposits without LMI; others still require genuine savings components.
Key Takeaways
LMI adds significant cost to home loans under 20% deposit, but it enables earlier market entry. Whether to pay LMI or save longer depends on your financial situation, market conditions, and opportunity cost. Discuss your circumstances with a mortgage broker to model different scenarios and make an informed decision.
Need personalized advice?
Every situation is different. Speak with one of our mortgage brokers to discuss how these principles apply to your circumstances.
Book a free consultationRelated Guides
How to Improve Your Credit Score for a Mortgage
Actionable steps to boost your credit score and improve your borrowing power before applying for a home loan.
Fixed vs Variable Interest Rates: Which is Right for You?
Compare fixed and variable rate home loans, understand the trade-offs, and choose the right structure for your situation.